Paul O. Dillon, Attorney at Law

Do Charitable Gift Annuities Work?

A Charitable Gift Annuity donated to a qualified 501(c)(3) charity creates an immediate tax deduction for a portion of the contribution and a fixed income stream from the charity for as long as the grantor lives. With the minimum contribution usually $5,000, a CGA is accessible for many people seeking to create a legacy and lower taxes, according to a recent article, “How about a gift that pays you back?” from Los Angeles Daily News.

Who could benefit from a CGA?

• A person who wants to give generously but is concerned about having enough income for the future.
• Someone who needs a last-minute tax deduction and has already reached contribution limits for an IRA or 401(k) plan.
• A philanthropic-minded person who wants to leave a large amount or all of their estate to charity and wishes to have the business end of their giving done all at once.
• A donor who wants to avoid or defer capital gains tax on an asset they want to donate to charity.

An estate planning attorney should be involved in creating and executing the CGA to ensure that all requirements are met so that the CGA achieves the desired results and works in tandem with the rest of the estate plan. The estate planning attorney will set up the CGA. You then donate the asset to the charity. The gift is set aside and invested by the charity. You receive fixed monthly or quarterly payments as long as you are living. After your death, the charity receives the funds remaining in the account.

The income tax deduction is the contribution minus the present value of the payments to the donor. The estate planning attorney can make the calculations. Current annuity rates range from 4.6 to 10.1% for 50 and older, based mainly on age. Let’s say someone made a $100,000 contribution. They would receive $4,600 to $10,000 a year from the charity.

The amount received never fluctuates and is fixed so it won’t adjust for inflation. However, it is secured by the charitable organization’s assets and continues at the stated rate, no matter how the annuity investments perform.

Another example: a couple in their 70s funds a Charitable Gift Annuity with $50,000 of appreciated stock originally purchased for $20,000. They will receive an income tax charitable deduction of $17,584 and a payment of 6% or $3,000 a year for the rest of their lives.

This kind of donation is advantageous to both the donor and the nonprofit. The charity needs to be a qualified 501(c)(3), and it’s best to pick a well-established charity with a Charitable Gift Annuity program in place. Your estate planning attorney will be able to review the program to be sure that it aligns with your overall estate plan.

Reference: Los Angeles Daily News (Dec. 29, 2024) “How about a gift that pays you back?”

Is It Better to Transfer Assets before Death?

Many people like to give inheritances after they have passed. However, another approach is to gift while living, which has some definite advantages for both the giver and the recipients. As explained in the article, “Gifting While You’re Alive: Tax Benefits and Practical Tips,” from Kiplinger, giving while living allows you to see how your legacy helps others, provides for greater control and has tax advantages.

Reasons for gifting while living vary widely. Therefore, be sure that your gifting strategy is part of a comprehensive estate plan and makes sense for your financial needs during your lifetime. Don’t give assets you need to cover living expenses, surrender investments early to incur additional costs or create a significant tax burden for yourself. Gifting while living should only be done if you and your spouse can afford it.

In 2024, individuals can give up to $18,000 per person to as many people as they want. In 2025, the level will increase to $19,000 per person for an individual and $38,000 for a married couple.

The IRS defines a gift as a property transfer where no equal value is received in return. Whether your gift is used for a down payment on a house, adding an owner to real estate property, paying off a debt for someone else, or forgiving a previous loan, check with an estate planning attorney to be sure that you are staying within the exclusion levels. Anything over the limit will incur taxes.

If your generosity extends to helping with educational costs or medical debt, be sure to make payment directly to the hospital, care facility, university, or private school. Only direct payments are gifts.

Gifting assets like shares in a business or real estate requires a professional appraisal to document the value of the gift. You don’t want to draw any attention from the IRS, so be sure to follow the guidelines.

If you hope to help a family member buy a home, you could structure your gift as an intrafamily loan. There are guidelines you’ll need to follow to make sure this is not considered a taxable gift by the IRS.

When gifts are made could matter as much as their size. Be careful when gifting appreciated assets and discuss this with your estate planning attorney beforehand. Inherited assets receive a step-up in basis at death. Still, inherited assets retain their original cost basis and could lead to capital gains taxes for the recipient if they sell the assets. If you gift your home to your children, for instance, they may be subject to a big tax bill if they sell the house in the future.

Section 529 educational savings plans are a great way for grandparents to help with their grandchildren’s education. Contributions can be front-loaded, allowing up to five years’ worth of contribution to be made at once—as much as $90,000 in 2024 and $95,000 in 2025 to a single 529 plan. Any additional gifts to the same beneficiary during the five-year period following the big funding could trigger gift taxes.

Talk with your estate planning attorney about making this kind of giving part of your overall estate plan. Seeing your family enjoy your generosity and knowing you’ve made a big dent in estate and inheritance taxes is a warm feeling for all concerned.

Reference: Kiplinger (Dec. 4, 2024) “Gifting While You’re Alive: Tax Benefits and Practical Tips”

How to Help Heirs Prepare for an Inheritance

If your family doesn’t talk about estate planning, including incapacity, death, or money, your heirs aren’t likely to know what to do if and when you become incapacitated, when you die or how to manage your assets when they become their inheritance. This is all too often the case, but it doesn’t have to be; according to a recent article from Madison Daily Leader, “Are your heirs ready to receive an inheritance?”

When an inheritance arrives, it’s accompanied by emotional, financial and legal issues. Having everyone prepared and informed can make the difference between a squandered inheritance, an inheritance consumed by taxes, or an inheritance wisely managed and benefiting one or more generations.

There are key issues to discuss, including matters to cover with an estate planning attorney.

Communicate with your family about your estate plan, which is more than a will. Incapacity planning includes a Power of Attorney and Healthcare Power of Attorney, two documents allowing you to name someone else to act on your behalf if you cannot express your wishes. A living will tells loved ones your wishes regarding end-of-life care. With it, your family will know if you want to be kept alive by artificial means. Without it, they’ll have to guess.

Sharing the contents of your will allows loved ones to know what to expect. They may not all be happy with your decisions. However, it won’t be a surprise and will be less likely to spark disputes after you have passed.

Do your heirs know how to manage money or other assets? If you’re leaving your heirs wealth in the form of stocks, real estate, IRAs, 401(k)s, cash, or cryptocurrency, they’ll need to be prepared to accept the assets. If your estate includes a vacation home, is there a plan for sharing it among heirs? These issues will be more manageable, if heirs understand what they are inheriting and what they’ll need to do.

An estate plan should address taxes for the people creating the plan and their heirs. While your family may not have to worry about federal estate taxes, some states still have inheritance and estate taxes. Withdrawals from certain types of inherited accounts may incur state and federal income taxes, which could take a bite out of their inheritance. If inherited assets are sold for more than they were worth at the time of inheritance, there may be capital gains taxes.

Every estate has some expenses to be considered, including funeral costs. If the decedent has a mortgage and the home is left to heirs, they may need to sell it quickly before expenses mount. The estate plan should include an inventory of all liabilities and assets, so the executor can address any outstanding debts.

There’s a lot to unpack when managing an estate. Start by having an estate plan created with an experienced estate planning attorney or update an existing plan to be sure that it still achieves your wishes. Talk with heirs so they understand your intentions. Leaving a legacy of caring takes many forms, and this is one of them.

Reference: Madison Daily Leader (Nov. 23, 2024) “Are your heirs ready to receive an inheritance?”

How Does Grantor Trust Status Have an Impact on Step-Up in Basis and Estate Tax Exclusion?

If you’re considering establishing an irrevocable trust as part of your estate plan, you’ll want to understand how the trust will affect your capital gains taxes and estate tax exclusions. According to a recent article, “This Double-Dip Trust Benefit Really Is Too Good to Be True,” from Kiplinger, there is no double dip. Here’s why.

An irrevocable trust could be considered a grantor trust, meaning the person who made the trust will be regarded as the owner of the trust’s income or principal. The grantor will include trust income, deductions and credits on their own personal taxes, despite the trust not distributing the income to the grantor and the income remaining within the trust. Taxes for personal income are usually lower than trust tax rates, which is one of many reasons to use grantor trusts.

The IRS issued Revenue Ruling 2023-02 in early 2023 as a clarification. Suppose that assets in an irrevocable trust are excluded from the grantor’s gross estate. In that case, estate-excluded assets do not get a step up in basis for capital gains tax under Internal Revenue Code Section 1014, even if the grantor was paying income taxes on the trust income as described above.

The ruling was intended to clarify the confusion surrounding different tax rules: income tax rules, capital gains tax rules and gift and estate tax rules. This wasn’t really a big change; it was just a much-needed clarification

Experienced estate planning attorneys already knew the rule: property transferred to an irrevocable trust under a completed gift doesn’t qualify for a step-up in basis for capital gains tax savings, even if the grantor pays the taxes on the trust.

The people surprised by the ruling believed—wrongly—they could pay trust income taxes under the lower individual tax rates and exclude property from their gross taxable estate, while also gaining a step-up in basis on capital gains taxes.

Using the trust as a grantor so the trust maker pays the trust taxes has never been a valid means of stepping up the basis in completed-gift trust assets outside of the grantor’s gross estate.

Creating a solid estate plan using acceptable strategies with an experienced estate planning attorney will prevent future tax issues for the estate and heirs, which are far more expensive than doing it right the first time.

Reference: Kiplinger (Sept. 15, 2024) “This Double-Dip Trust Benefit Really Is Too Good to Be True”

Charitable Giving Trusts Protect Assets and Create a Legacy of Giving

James Gandolfini was beloved for his role as Tony Soprano in the HBO show The Sopranos. His early death revealed a lack of estate planning and some painful lessons for his real-life family. Gandolfini left a $70 million estate and about 80% of it was not protected from estate taxes. A recent article from Investing Daily, “How to Avoid The Estate Planning Mistakes of James Gandolfini (aka Tony Soprano),” explains two of the many options Gandolfini didn’t take advantage of.

A Charitable Lead Trust, or CLT, serves several purposes. It provides a stream of income for a certain amount of time to a charitable organization. At the end of the period, the property in the trust goes to the donor or the beneficiary. When the gift is made under a CLT, the grantor immediately gets a federal income tax deduction equal to the present value of the future income stream. It should be noted that taxes do have to be paid every year by the donor on the value of the income interest paid to the charity.

You can create a CLT during your lifetime or establish it upon your death by stipulating it in your will. By establishing the CLT at death, an estate tax deduction is created. The CLT serves to reduce estate taxes and supports a charity you care about.

A similar trust is known as a Charitable Remainder Trust or CRUT. This type of trust increases the income stream while lowering taxes. With a CRUT, you are donating to charity.  However, you earn income from the donated assets during your lifetime. The objective is to sell a major appreciated asset without paying capital gains taxes on the profits. The donor funds the CRUT, and the charity receiving the asset is the charitable beneficiary. The charity must be an IRS-approved charity to gain these benefits.

The CRUT’s trustee can be the donor, the charity, an independent trust manager, or any person designed by the donor. Anyone receiving income from the asset under the terms of the CRUIT is known as an income beneficiary.

The trust document must name the trustee, the charitable beneficiary, the percentage to be paid to income beneficiaries and all the terms of the trust. The trust document also must specify the annual percentage paid by the donor, an amount between 5% and 50%. The annual percentage is required to give at least 10% of the amount transferred to the CRUT.

The trust can be funded with any kind of asset. The trustee then sells the assets, reinvesting the proceeds into a financial instrument owned by the trust. The term can be for the life of the donor or the life of a donor plus someone else. The CRUT can also be set by years, up to 20 years.

CRUTs and CLTs require the knowledge of an experienced estate planning attorney to be sure that they meet all the necessary guidelines to achieve their goals. For many people, these are excellent tools to create a family legacy of giving, while enjoying tax benefits and growing assets.

Reference: Investing Daily (Sep. 11, 2024) “How to Avoid The Estate Planning Mistakes of James Gandolfini (aka Tony Soprano)”

Relocating in Retirement? What You Need to Know before You Go

Moving in retirement is a big deal. Whether moving to be closer to family or trying to cut your living costs, moving in your sixties or seventies should only happen after much consideration and careful planning. A recent article, “Moving in Retirement? 5 Things to Ponder Before You Pack” from Nerd Wallet, explains the details.

Lower property taxes or income taxes are an attraction for many. However, look at all the costs to get a total picture, including the cost of living, estate taxes and housing costs, which have rocketed in many Sunshine states. You may find the difference is not as much as you thought. Suppose you’re selling a business before you leave. In that case, your current state may be more interested in recouping taxes than you think, so speak with an estate planning attorney to make the sale as tax efficient as possible.

One unexpected opportunity from moving outside of a Medicare Advantage’s service area is the chance to change your Medicare coverage. Relocating provides an acceptable reason to change a Medicare Advantage plan or sign up for original Medicare. It is also a time when you can sign up for Medigap coverage. You can normally only sign up for Medigap during open enrollment, a six-month period after you turn 65, and when you have Medicare Part B. This coverage is difficult to buy later in life if you have health issues.

Don’t forget to notify your insurance companies and Social Security if you move.

Could you rent first? If you’re moving to a place where you’ve summered for twenty years, renting for the first year is best. The winters may not be as bucolic as the summer. If you have to sell a house quickly after a short period, it could be a costly mistake. You’ll also own capital gains taxes on any profit made on a home sale if you move after living in a new location for less than two years.

What level of healthcare services do you need now or might need in the future? Healthcare becomes more critical as we age, especially if we are living with a chronic condition. If services are not the same quality or are a day’s drive away, your move could lead to bad health outcomes and added stress.

Estate law is state-specific.  If so, your estate planning documents—last will and testament, power of attorney, health care power of attorney, living will, trusts and other documents—may not be considered valid by the courts in your new state. Consult with an estate planning attorney about what needs to be changed to be sure that your estate plan will give you the same results in your intended new state.

Will you enjoy your daily life in your new location? Retirees active in social activities, from sports to community theater to volunteer work, report enjoying their retirement. Will you be living with people who share your interests and values? Will you feel comfortable if your political views differ from those around you?

One last point: transportation doesn’t usually feel like an issue until it is. If your children live on the West Coast and you’re considering moving to a small New England town, will the added cost make frequent visits prohibitive? If your retirement agenda includes a lot of international travel, you may want to consider how living far from an airport will impact your travel plans.

Reference: Nerd Wallet (Aug. 5, 2024) “Moving in Retirement? 5 Things to Ponder Before You Pack”

Who Should Pay Taxes on Trust Income?

Irrevocable trusts include language directing how taxes on income should be paid. This falls into two general kinds of taxes, according to a recent article from Kiplinger, “Should You or the Trust Pay a Trust’s Income Taxes?” The first category includes transfer taxes, typically in the form of gift and estate taxes and generation-skipping transfer taxes, which are less common. The second category includes income taxes, such as earned income taxes and income taxes on investments, as well as capital gains taxes, best described as income taxes on property appreciation following the sale or exchange of property.

Who is responsible for paying these taxes? Rental income from real estate, profits from trust investments, appreciation income from selling property and distributions of assets from the trust are all taxable. Trust income is reported on either the trust’s income tax returns or on the tax return of either the trust maker or the beneficiary. The trust income tax return pays taxes at trust tax rates, while the beneficiary will pay taxes at individual tax rates.

While it seems intuitive to opt for the trust to pay the taxes, trust tax rates are often far higher than individual tax rates.

Trust tax rates are higher because an irrevocable trust has only hundreds of dollars of standard deductions. Irrevocable trusts pay the highest federal taxes after a few thousand dollars of income. Unless the trust maker is already paying taxes in the highest tax brackets, it’s almost always less costly for the taxes to be paid by the trust maker.

When speaking with your estate planning attorney about how to structure an irrevocable trust, the conversation will include how the irrevocable trust’s tax responsibilities will be managed. When the trust is being created, examine your budget to ensure the taxes will be manageable.

The language in the trust is known as “grantor trust status,” permitting the trust maker or another person to pay trust income taxes.

When an irrevocable trust is treated as a grantor trust, the trust maker is treated as the owner of the trust’s income or principal and must include any items about trust income, deductions and credits on their personal tax filing. This is required even though income remains in the trust.

Making matters more complicated, in some cases, having trust income tax grantor powers may mean the trust is included in the trust maker's taxable estate. Estate taxes are different from trust taxes. If the grantor has the power to revoke or amend the trust, it may also be considered part of the grantor’s taxable estate, as opposed to a true irrevocable trust outside of their estate.

Creating and planning trusts should only be done with the help of an experienced estate planning attorney, as there are many nuances to be considered.

Reference: Kiplinger (July 1, 2024) “Should You or the Trust Pay a Trust’s Income Taxes?”

What’s the Best Way to Pass the Family Home to Heirs?

One family wanted their daughter to have the home where she grew up. They gave it to her as a gift.  However, they continued to live in it until their deaths. With the help of an estate planning attorney, the process was handled outside of their will, according to a recent article from Newsday, “Wills, trusts, sales: How Long Island parents pass houses to kids.” This ensured that the house didn’t go through probate, which can be costly and time-consuming.

In a real estate market where prices and interest rates keep rising, parents are taking steps to keep their homes in the family, building generational wealth and creating a legacy of stability. However, how this is accomplished can have consequences, especially regarding Medicaid eligibility and taxes.

The best of circumstances is when parents can hand down a home they own outright, with no mortgage or a small mortgage. When property is transferred from one owner to another, the bank or mortgage lender can demand the full mortgage payment. While the parents could continue to pay the mortgage, the lender could still demand full payment once ownership transfers.

If the mortgage company decides to demand full payment, the mortgage cost could go up dramatically, since interest rates today are higher than they were ten years ago.

Leaving a home to a child in a will is the most common way to pass the house to the next generation. If the children decide to sell the house, the basis is the value of the house at the time of the parent’s death. Beneficiaries named in a last will and testament get a stepped-up basis. This means the capital gains the heir incurs are based on the home’s value at the time of the parent’s death. The value of the home when the children decide to sell could be far higher. However, the gain is erased for tax purposes for the heirs, which is a significant saving.

If children decide to keep the house for a while, they should get an appraisal or comparative marketing analysis to prove the home's value at the time of death. If the house is sold many years later, they must confirm this value to use the stepped-up basis.

If the house remains in the parent’s name while they are living, the children may face an issue if the parent needs to apply for Medicaid for long-term care. Medicaid could deny coverage if the house is in the applicant’s name, no spouse is living in the home and the applicant’s equity is higher than the current $1.071 million limit. Medicaid might still pay for long-term care if someone owns a home under the limit and is otherwise eligible. However, it could claw back money from the Medicaid patient’s estate after they die.

Gifting a house is another way to transfer ownership. Parents can sign deeds and gift the property.  However, this needs to be done with the lifetime federal gift tax exemption in mind. While the $13.16 million level is one most people don’t need to worry about, it’s a factor for wealthy people.

Other options for transferring a home include using revocable or irrevocable trusts and transferring homes by signing over a deed while retaining a life estate on the deed, which allows parents to remain in the home as long as they live.

The best way to transfer a family home to the next generation starts with consulting an estate planning attorney to review the options. Family dynamics, tax planning and Medicaid all need to be considered. Just as with all things concerning estate planning, the best plan is to put a plan into place long before it’s needed.

Reference: Newsday (May 2, 2024) “Wills, trusts, sales: How Long Island parents pass houses to kids”

What’s the Best Way to Pass the Family Home to Heirs?

One family wanted their daughter to have the home where she grew up. They gave it to her as a gift.  However, they continued to live in it until their deaths. With the help of an estate planning attorney, the process was handled outside of their will, according to a recent article from Newsday, “Wills, trusts, sales: How Long Island parents pass houses to kids.” This ensured that the house didn’t go through probate, which can be costly and time-consuming.

In a real estate market where prices and interest rates keep rising, parents are taking steps to keep their homes in the family, building generational wealth and creating a legacy of stability. However, how this is accomplished can have consequences, especially regarding Medicaid eligibility and taxes.

The best of circumstances is when parents can hand down a home they own outright, with no mortgage or a small mortgage. When property is transferred from one owner to another, the bank or mortgage lender can demand the full mortgage payment. While the parents could continue to pay the mortgage, the lender could still demand full payment once ownership transfers.

If the mortgage company decides to demand full payment, the mortgage cost could go up dramatically, since interest rates today are higher than they were ten years ago.

Leaving a home to a child in a will is the most common way to pass the house to the next generation. If the children decide to sell the house, the basis is the value of the house at the time of the parent’s death. Beneficiaries named in a last will and testament get a stepped-up basis. This means the capital gains the heir incurs are based on the home’s value at the time of the parent’s death. The value of the home when the children decide to sell could be far higher. However, the gain is erased for tax purposes for the heirs, which is a significant saving.

If children decide to keep the house for a while, they should get an appraisal or comparative marketing analysis to prove the home's value at the time of death. If the house is sold many years later, they must confirm this value to use the stepped-up basis.

If the house remains in the parent’s name while they are living, the children may face an issue if the parent needs to apply for Medicaid for long-term care. Medicaid could deny coverage if the house is in the applicant’s name, no spouse is living in the home and the applicant’s equity is higher than the current $1.071 million limit. Medicaid might still pay for long-term care if someone owns a home under the limit and is otherwise eligible. However, it could claw back money from the Medicaid patient’s estate after they die.

Gifting a house is another way to transfer ownership. Parents can sign deeds and gift the property.  However, this needs to be done with the lifetime federal gift tax exemption in mind. While the $13.16 million level is one most people don’t need to worry about, it’s a factor for wealthy people.

Other options for transferring a home include using revocable or irrevocable trusts and transferring homes by signing over a deed while retaining a life estate on the deed, which allows parents to remain in the home as long as they live.

The best way to transfer a family home to the next generation starts with consulting an estate planning attorney to review the options. Family dynamics, tax planning and Medicaid all need to be considered. Just as with all things concerning estate planning, the best plan is to put a plan into place long before it’s needed.

Reference: Newsday (May 2, 2024) “Wills, trusts, sales: How Long Island parents pass houses to kids”

Estate Planning has Begun for Exemptions Expirations

The high lifetime estate and gift tax exemptions gave extremely wealthy Americans terrific tax breaks. In 2024, exemptions are currently at $13.61 million per person and $27.22 million for married couples.  However, the end of these levels means that taxpayers with wealth of a much lower magnitude will need to prepare, according to a recent article from Forbes, “Wealthy Families: Consider These Planning Ideas Before ‘The Sunset.’”

Some state estate taxes are tied to federal estate taxes, so people of modest wealth should check with their estate planning attorney to be sure they are properly situated before the law changes. In addition, several strategies can be considered and applied to many tax brackets.

Charitable Giving. Instead of making a gift through a trust, you might consider donating cash to a charity. Under the 2017 law, the deductions for direct cash contributions jumped from 50% of AGI to 60%, including gifts to Donor-Advised Funds (DAFs). When the exemptions end, the limit will return to 50%, so if you are charitably inclined, making a cash gift now is a good idea.

Strategic Gifting. Assets depressed in value may have tax value as gifts. You might gift them to a beneficiary or a trust, so their appreciation may occur after they have been removed from your taxable estate. This creates two wins: the depressed assets will use less of your lifetime estate and gift tax exemption, and their future growth and possible increase in value will take place outside of the taxable estate.

“Substitution Powers” Assets. If you have transferred assets to grantor trusts with retained “substitution powers," consider moving low-basis assets out of trusts at a lower current value in exchange for higher-basis assets of equivalent value. This strategy could lessen capital gains on the lower-basis assets by returning them to the taxable estate and benefit from the step-up in basis at death. Talk with your estate planning attorney about how this might work for you.

Business Owner Planning. The Qualified Business Income (QBI) tax deduction created by the Tax Cuts and Jobs Act allows select pass-through entities, like sole proprietorships, partnerships, and S-corp owners, to deduct as much as 20% of business income. There are income thresholds and other limits to consider. However, this tax deduction ends on December 31, 2025. Accelerating income now could be of great value for business owners who qualify.

Basic Income Tax Planning. Income tax brackets will return to their levels before the TCJA law was enacted. The top bracket may increase to 39.6%, so you may not want to defer income. Middle tax brackets are also expected to expand.

Alternative Minimum Tax and Incentive Stock Options. The exemption amount for the AMT increased under the TCJ. However, this will also return to previous levels, making more taxpayers vulnerable to the AMT. One workaround is to exercise incentive stock options, which aren’t considered income for regular tax purposes but are considered income for AMT taxes. The AMT could be due in the year of exercise. If you can exercise before 2026, it could be a tax-savvy move.

Estate Planning Strategies. Planning needs to be flexible, since there is no way to know if Congress will or won’t act to renew TCJA. It may seem like there’s time to make any necessary changes. However, it takes time to create and execute a plan, which is why wealthy families are acting now to protect their assets.

Reference: Forbes (March 6, 2024) “Wealthy Families: Consider These Planning Ideas Before ‘The Sunset’”